The latest Federal Reserve meeting on interest rates could usher in an era of smaller stock market gains.
According to Wells Fargo's Christopher Harvey, its expected rate hike announcement on Wednesday afternoon will help create a less favorable climate for another record leg higher for stocks. So, he's advising investors to change their portfolio strategies to safeguard gains.
"The interpretation of the Fed will be a little bit more hawkish. And so, we think that puts a ceiling on equities," the firm's head of equities said Tuesday on CNBC's "Futures Now." "It's been a heck of a run."
That run included 19 record-high closings this year for the S&P 500.
"Early this year, we were very aggressive with the market. We thought investors had about 10 percent upside. You have now realized about 9 to 10 percent of that upside," he added.
With the Fed expected to continue raising rates and with risks from a trade war and midterm elections, Harvey has been turning more defensive with each new market high.
"We're looking for possibly a mild pullback," Harvey said. "I think it's more of a garden variety pullback — maybe 1, 2 or 3 percent, at most."
Harvey's prediction is far from a correction call. But for equity investors accustomed to double-digit returns, it'll likely be disappointing.
To cope with a more challenging environment, Harvey has been telling clients to get more conservative by taking risk out of their portfolios and moving to quality, value names. He's also recommending sprinkling in a contrarian play or two, with the understanding that upside may still be limited.
"One of the things that comes to mind is large cap biotech. It's rather contrarian. The valuation is much more attractive as it has underperformed," he said. "In addition to that, you're seeing very healthy buybacks in the space, and we think that's the catalyst to unlock value."
Harvey is maintaining his S&P 500 year-end target of 2,950, an anemic 1 percent gain from current levels.
"We think everyone needs to lower their expectations as they go forward, and we're looking at mid-single-digit [percentage] returns for 2019," Harvey said.